Multiple Choice Questions
1 Which of the following statements regarding bonds payable is true?
a. When an issuing company’s bonds are traded in the ‘‘secondary’’ market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser.
b. The entire principal amount of most bonds mature on a single date.
c. Generally, bonds are issued in denominations of $100.
d. A debenture bond is backed by specific assets of the issuing company.
2. Bonds are sold at a premium if the
a. Issuing company has a better reputation than other companies in the same business.
b. Market rate of interest was more than the stated rate at the time of issue.
c. Company will have to pay a premium to retire the bonds.
d. Market rate of interest was less than the stated rate at the time of issue.
3. If bonds are issued at 101.25, this means that
a. A $1,000 bond sold for $101.25.
b. A $1,000 bond sold for $1,012.50.
c. The bonds sold at a discount.
d. The bond rate of interest is 10.125 percent of the market rate of interest.
4. What best describes the discount on bonds payable account?
a. A liability.
b. A contra liability.
c. An asset.
d. An expense.
5. The premium on bonds payable account is shown on the balance sheet as
a. An addition to a long-term liability.
b. A subtraction from a long-term liability.
c. A contra asset.
d. A reduction of an expense.
6. When bonds are issued by a company, the accounting entry typically shows an
a. Increase in assets and an increase in liabilities.
b. Increase in assets and an increase in stockholders’ equity.
c. Increase in liabilities and an increase in stockholders’ equity.
d. Increase in liabilities and a decrease in stockholders’ equity.
7. Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7 percent, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)
a. Interest Expense Cash
b. Interest Expense Bonds Payable Cash
c. Interest Expense Discount on Bonds Payable Cash
d. Interest Expense Discount on Bonds Payable Cash
8. Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6 percent and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
a. $6,000
b. $30,000
c. $60,000
d. $120,000